Congress Section 893 (2016 NDAA) and DCAA. The Saga Continues on DCAA’s Incurred Cost Backlog

2016 NDAA (National Defense Authorization Act)

As reported in our December 3, 2015 blog,2016 Defense Authorization Act Section 893, the 2016 National Defense Authorization Act (NDAA) includes a requirement, ostensibly for improved DCAA auditing, but more narrowly focused on the so-called incurred cost audit backlog (contractor indirect cost rate proposals (ICPs), submitted annually as required by FAR 52.216-7(d)).   Section 893 prohibits DCAA from providing “audit support” for non-defense agencies (e.g. NASA) unless DOD certifies that DCAA is current on the ICP backlog.  “Current” is defined as 18 months of incurred cost inventory, further defined as “the level of contractor incurred cost proposals in inventory from prior years that are currently being audited by DCAA”. 

DCAA’s Response to Freedom of Information Act (FOIA) Request

Since we published the December blog, DCAA has sort of responded to our FOIA (Freedom of Information Act) request for: i) the number of contractor ICPs in inventory on the date of the 2016 NDAA, ii) DCAA’s description of the ICP inventory (how is it counting this inventory, and iii) the results (did DCAA meet the requirement to be current as defined in the 2016 NDAA?).  In its final FOIA response, DCAA indicated that its research identified 5,712 ICPs in inventory; however, DCAA did not respond to any questions (ii and iii) noting that FOIA does not require an agency to provide answers to questions (FOIA only requires an agency to provide existing, releasable documents as if DCAA does not have an existing document which answers the questions).  The less than subtle message, FOIA is anything but transparent in spite of President Obama’s message (January 21, 2009), “The presumption of disclosure should be applied to all decisions involving FOIA”.

DCAA Audit Guidance Interpreting Congressional Intent

Fast-forward to January 7, 2016 and DCAA Audit Guidance Memorandum No. 16-PPD-001(R) on: “The Impact of the National Defense Authorization Act on DCAA’s Audit Support to Non-Defense Agencies”.   In terms of what we (DCAA) know, this document confirms that DCAA did not meet the requirement; hence, DCAA can no longer provide “audit support” for non-DOD agencies (e.g. NASA, DOE, and DHS).  However, DCAA’s audit guidance memorandum includes a legal opinion (interoffice memorandum signed by DCAA’s Acting General Counsel) which interprets Section 893; in particular a discussion of the fine line between “audit support” and other than audit support.   In particular a statement:  “The fact that Congress limited the restrictions to the performance of audit support rather than include other types of services performed by DCAA indicates that Congress intended to only restrict DCAA from performing audits for non-defense agencies.”   We have no idea if DCAA made any attempt to confirm what “Congress intended”; however, there is nothing in the Congressional record which would suggest that Congress “split-hairs” in terms of intending for DCAA to assume a narrow definition of audit support (excluding non-audit support).  Unless Congress is well versed in the nuances of GAGAS (Government Auditing Standards), it is more likely that the Congressional intent was a broad definition which would preclude DCAA from providing any support to non-defense agencies (a logical assumption that by its very nature an audit agency provides (broadly defined) audit support).

Although DCAA’s in-house legal opinion used the inexact wording of the 2016 NDAA to open the door for DCAA to perform non-audit services for non-defense agencies that same legal opinion stated that DCAA could actually provide audit services for civilian agencies if the incremental requirements (audit resources) were de minimis.  For example in auditing a contractor ICP which included a mix of defense and non-defense contracts, DCAA could test direct costs for non-defense contracts if the additional audit resources were de minimis.    Nothing in the 2016 NDAA provides any qualifier with respect to what appears to be an absolute prohibition on DCAA providing audit services to non-defense agencies; however, DCAA appears to be focused on interpreting and/or embellishing the written words to achieve preferred and most likely a pre-determined outcome.   Although it might be meritorious on DCAA’s part to seek opportunities to provide some audit support/services to non-defense agencies, it’s impossible to use the wording of the 2016 NDAA to support the belief that Congress intended for DCAA to perform any audit services for non-defense agencies.

It remains to be seen if Congress will intervene (i.e. actually state or clarify its intentions) and in any case this debate could be limited to FY2016.   The most obvious reason, Section 893 only applies to the 2016 NDAA, by implication only to DCAA’s FY2016 funding.  The other less obvious reason, if DCAA sufficiently reduces its ICP backlog during FY2016, Congress will have achieved its objective and there would be no logical reason for including a similar restriction in the FY2017 NDAA.

DCAA’s Challenge

It also remains to be seen if DCAA field auditors will be up to the challenge (or willing) to de-scope certain audit steps to determine that non-defense contracts (direct costs) can be audited with de minimis incremental audit resources.  In and of itself, a risky strategy given the history of DCAA’s failures to comply with GAGAS largely attributed to inadequate testing.  As stated in the December 3, 2015 blog, 2016 will continue to be an interesting and evolving year for those contractors with defense and non-defense contracts.